By Nicolas Clavel and Ben Storrs
Recent volatility in emerging markets has prompted debate on how countries can balance development and economic stability. This is particularly relevant to Africa, which is now developing quickly after seeming to lag behind other developing markets in Asia and Latin America for much of the 20th century.
GDP in sub-Sahara Africa has grown at an average of 5.1% per annum since 2000(1). From a relatively low base, a commodities boom has increased the US dollar value of exports more than threefold during the last decade(2). Investments in infrastructure have helped sustain commodity exports, which have underpinned economic growth. One consequence of increasing wealth is more imports into Africa. Imports from Europe have steadily increased, even after the value and volume of exports reduced by almost a third in 2009(3). Imports from China increased almost 20% in 2013 following an increase of 16.7% in 2012, although Africa has a net trade surplus with China(4). The type of products Africa is beginning to import – increasingly consumables – is illustrative of the growth of middle class in Africa, but it also puts more pressure on foreign exchange reserves.
Imports into Africa are paid in foreign currency so banks require access to foreign exchange in order to honour their international payment commitments. A central bank without liquid reserves or other access to foreign exchange will struggle to fund imports and retain investor confidence in its currency. In recent years, keen to avoid the investment crises which afflicted Asian economies in the late 1990s, African countries, including Ghana, Kenya, Mozambique, South Africa, Tanzania and Zambia, have gradually increased the nominal amount of foreign exchange reserves or maintained high levels.
Despite this, the increasing value of imports has strained foreign exchange reserves and since 2009 import cover has generally fallen. Import cover is the period of time a country can fund its imports from its current reserves if it stopped earning foreign exchange. On average import cover fell from approximately five to three-and-a-half months between 2009 and 2012(5). In perspective this should be more than adequate cover. Zambia prospered throughout the 2000s despite often having reserves equivalent to only two months and many larger economies, for example the UK, have import cover of weeks rather than months.
This raises more questions than it answers regarding the recent volatility in emerging markets. One explanation may be that as African economies have become more integrated into the international trade system they are also more vulnerable to a collapse in exports. For instance, at the end of 2013, Tunisia’s foreign exchange had fallen by US $4bn (37%) while Egypt’s reserves had halved to $17bn from the start of 2011. These changes are the result of the Arab Spring disrupting exports, tourism and discouraging new investment. The IMF as well as Qatar has offered foreign exchange credit lines to fund imports if these countries run into liquidity issues. Nigeria’s foreign exchange reserves have also fallen from US $62bn in mid-2008 (the highest in Africa after Libya) to $40bn due to a fall in the value of their main export, crude oil. If it did not initially have cover of eight-and-a-half months it would have experienced more difficulties.
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